Re: Deficit Spending and Government Debt
- From: "The Trucker" <mikcob@xxxxxxxxxxx>
- Date: Thu, 18 Aug 2005 10:29:05 -0700
William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
news:m4l4g1du0ct40i6sjcr1tcbrcpp0bqjobk@xxxxxxxxxx
> Deficit Spending and Government Debt
>
> Deficit spending means spending in excess of tax revenues.
> Essentially all of that spending must be recaptured to enable the Fed
> to control the inter-bank lending rate, i.e. the Fed funds rate. The
> Treasury normally does that by selling its own securities -- bills,
> notes, and bonds -- to the public.
>
> The Open Market Committee of the Federal Reserve sets the target for
> the funds rate. That rate establishes the upper limit on what banks
> must pay to borrow, and thereby determines the interest rate that
> banks charge on their loans. Bank lending rates directly affect the
> demand for loans and thus the amount of bank credit issued. That in
> turn determines the financial liquidity of the private sector. Too
> little liquidity will stunt investment and economic growth. Too much
> creates inflationary pressures that can cause other problems for the
> economy.
>
> It is evident then that maintaining a balanced reciprocal flow of
> funds between the Treasury and the private sector is an essential
> element in controlling the health of the economy. The question arises
> -- can the Treasury always sell its debt securities to cover its
> deficit spending? The answer is "yes" as explained in the following
> scenario:
>
> Say the Treasury needs $10 billion by the end of the month to cover
> its deficit spending. It announces an auction for $10 billion of its
> securities to be sold at or before the end of the month. The auction
> participants, mainly large financial firms such as banks and
> securities dealers, bid competitively on a yield basis. That is, they
> state the yield and the dollar amount they will commit at that yield.
>
> There will always be a yield at which those with non-interest-earning
> dollars to spend will be willing to purchase interest-earning Treasury
> securities, and the Treasury can always meet whatever yield the market
> demands. The successful bidders are those who bid the lowest yields
> and whose combined bids total $10 billion. The highest yield among
> those bids sets the yield for the entire group. Bidders seeking a
> higher yield are rejected.
>
> It is worth noting that the Treasury need never default on its
> outstanding debt. It can always sell new debt to cover the maturing
> debt. That is true regardless of the total amount of Treasury debt
> outstanding.
>
> Another option, but almost never used, is for the Treasury to borrow
> directly from the Fed to cover its deficit spending. However that
> option would result in an uncontrolled increase of bank reserves. In
> order to maintain control of the Fed funds rate, the Fed itself would
> have to recapture the excess reserves. It would do so by selling
> Treasury securities from its own portfolio in an auction process
> similar to that described earlier.
>
> William F Hummel
> http://wfhummel.net/deficitspending.html
Mr. Hummel is a very good migician. He will have you watch
the right hand while the left one does all sorts of tricks. I don't
think this is necessarily intentional but it is, nonetheless what is
exhibited in this very well put together description of how the
money system is messed with by the Fed.
What is missing, of course, is a proper presentation and
a proper appreciation for where the money (the money
needed to buy these here bonds, notes, repos, flipos and
harpos) comes from. It is quite obvious that somebody
had some money or they could not have purchased these
bonds. Yet there is no explanation of how the money
to purchase these bonds came into existence. There is,
however, a line that tells us that the Fed is loath to create
this money by loaning it directly to the Treasury. That
being the case, where did the money to buy these bonds
come from? Did Santa bring it and give it to all the
good little Republican bankers? It is easy to say that
the tt&l accounts of the Treasury were the recipient
of bank loans but that is not admitted here or anywhere
else. Yet I can't see how else the Treasury would get
the money for a new bomber than to borrow it from the
Fed or from the banking system. It is most certainly
true that the Treasury, after the fact, will, of necessity,
sell notes or whatever to "recapture" these dollars.
But what we have is TWO debts. We have the original
bank loan debt that created the liquid money. And
we have the debt now owed to the t-bill purchasers.
That seems to be quite sneeky and underhanded.
--
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org
"
.
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- From: William F Hummel
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